Online Extra: Tim Koogle: "I Love the Current Time"

Yahoo's former CEO says periods of economic downturn are the best time to start new enterprises

After grabbing Yahoo!'s reins in 1995 as the company's sixth employee, Tim Koogle helped build the portal into one of the Net's most powerful companies. Now, nearly two-and-a-half years after departing Yahoo (YHOO ), Koogle is convinced that high tech still offers big opportunities. He's now investing in and advising four stealth startups. BusinessWeek's Ben Elgin recently spoke with Koogle about where he sees technology today and tomorrow. Following are edited excerpts of their conversation:

Q: What have you been up to since Yahoo?

A: I've never really stopped working. It's in my bones. I've been trying to diversify what I do over the past couple years. I've been making investments in a few early-stage private companies. Most are technology-based, mainly in software. I'm involved with four companies right now, and a fifth that is in process.

Q: Are they smaller than Yahoo was when you joined it in 1995?

A: It would be difficult for them to be smaller! When I came to Yahoo, they hadn't finished their business plan and had no revenue. Two are beyond that significantly. One that has only been in existence 12 to 14 months is doing a revenue rate of $17 million or $18 million and is cash-flow positive. Two others are doing $2 million to $4 million in revenues and growing very fast.

Q: What's the biggest difference starting companies today, vs. when you helped get Yahoo off the ground?

A: The basic principles of starting and building the enterprises have never changed. To those of us who have made our careers as general managers and CEOs, these are all straightforward "Business 101" principles. You get the right people in place, build the right infrastructure early in the company, get the culture set right, manage cash heavily to make sure you always have capital to attack strategically, and never get ahead of yourself.

There were what I called "drive-by fundings" happening for a while, in 1997 to 2000. But I love the current time. I've always felt that periods of economic downturn are the best time to start new enterprises for two reasons. One is that things get rationalized a bit. People's expectations get a lot more normalized and a lot more real. That includes employees, business partners, and investors.

The other part is, large public companies, during periods of economic downturn, have a real challenge meeting Wall Street's expectations. When economic downturns happen, companies' top lines get shaved, their profits are squeezed, and CEOs of public companies have to watch their bottom lines. That means they rein in lots of variable spending and some fixed spending, including R&D budgets. Large public companies are tempted to underspend in development.

So, it's always a great time for new, early stage, innovative companies to get going. If you look at it historically, this happens over and over.

Q: Some pundits are arguing that the impact of info-tech innovation won't be as great going forward. Do you agree with this?

A: There might be some truth to it. But it's important to think about it in a broader context. The technologies that have a sustained impact are ones where the dislocation, or the innovation that gets established early, is actually a platform -- a platform from which more innovation can emerge.

Here are some tangible historical examples. Electricity and electric power distribution. Another example is more rapid and global transportation. Another is telephony. Another one is semiconductors and computing. A recent one was this global network that we call the Internet.

In each case, lots of companies got formed in the early stages and filled a big global need. The technology became ubiquitous and got to the stage where the platform that had been created became increasingly commoditized. But lots of innovation came off each one and stimulated a world of industries.

The same is true for information technology, as it's being discussed right now. There's an infrastructure that has emerged, particularly when it's coupled to the Internet. The infrastructure itself -- specifically, the raw platform for computing and networking -- has become increasingly commoditized. And the extensions off of it, many of which have yet to be developed, are the next wave.

Q: What do you see?

A: I think that industries and applications that leverage the platform of computing and the platform of the global network are worth a serious look. There are a lot of things that computing will increasingly enable. Keep an eye on everything related to health care. This can be raw materials, like drug discovery and genomics. Keep an eye on health-care informatics, which is the use of software and computing platforms to make health care and its delivery far more efficient. This is hugely fertile territory.

I'm also intrigued by possible dislocations in what we think of as electronic devices, like CPUs or memory devices. These are the raw building blocks of computing. There are a bunch of fundamental things going on in molecular electronics development that offer the opportunity to completely remake the landscape of how devices that fuel computing get made. There's an opportunity to take everything down to a molecular scale.

Size, cost, and power consumption of electronic devices can, potentially, be dramatically reduced. There are some very difficult technology problems to be solved, but I find this whole area of molecular electronics to be particularly interesting.

Q: Are any of the companies you're working with addressing this area?

A: Not yet. I find it interesting. The scale of dislocation that could be created if these things become economically feasible would be amazing.

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